T.D. 9845, 12/28/2018; Reg. §1.147(f)-1
IRS has issued final regs on the public approval requirement provided in Code Sec. 147(f); that requirement must be met in order for private activity bonds to qualify for tax-exempt treatment.
Background. In general, under Code Sec. 103, interest received by investors in eligible State and local bonds is tax-exempt for Federal income tax purposes. Interest on private activity bonds qualifies for this tax-exempt treatment only if the bonds meet the requirements for “qualified bonds” as defined in Code Sec. 141(e) and other applicable requirements provided in Code Sec. 103. Among other things, Code Sec. 141(e) requires that qualified bonds meet the public approval requirement of Code Sec. 147(f).
Under the public approval requirement of Code Sec. 147(f), both the governmental unit that issues the bonds (or on behalf of which the bonds are issued) and a governmental unit with jurisdiction over the location of the financed project must approve an issue of private activity bonds (and the approvals are referred to as the issuer approval and the host approval, respectively).
In 2017, IRS issued proposed regs regarding the public approval requirement. See Proposed regs update public approval requirement for tax-exempt private activity bonds.
IRS issues final regs. IRS has now adopted the proposed regs with amendments that include the following:
…Public hearing and reasonable public notice. Under the proposed regs, an issue of private activity bonds is approved by a governmental unit if a qualifying elected representative of that governmental unit approves the issue following a public hearing for which there was reasonable public notice. For this purpose, a public hearing is generally defined as a forum that provides a reasonable opportunity for interested individuals to express their views, orally or in writing, on the proposed issue of bonds and the location and nature of the proposed project to be financed. Reasonable public notice generally means a published notice that is reasonably designed to inform residents of the approving governmental unit, including residents of the issuing unit and the host governmental unit where a project is to be located, of the proposed issue.
The Preamble to the final regs provides that a governmental unit may not cancel a scheduled public hearing merely because the governmental unit received no timely requests to participate in the hearing.
Previously existing final regs provided that public notice was presumed reasonable if published no fewer than 14 days before the hearing. The final regs treat notice as presumed to be reasonably designed to inform residents of an approving governmental unit if, among other things, the notice is given no fewer than seven days before the public hearing. (Reg. §1.147(f)-1(d)(4))
The proposed regs proposed to treat notice as presumed to be reasonably designed to inform residents of an approving governmental unit if, among other things, the notice was posted to the approving governmental unit’s public Web site. The final regs provide that, for an issuer approval by an issuer that acts on behalf of a governmental unit, public notice may be posted on the public Web site of either the on-behalf-of issuer or the approving governmental unit. (Reg. §1.147(f)-1(d)(4)(iii))
The proposed regs required that, for public notices by Web site, a governmental unit also offer a reasonable alternative notice method for residents without access to the Internet. The final regs eliminate the requirement for an alternative method of obtaining the information in a Web site notice. (Reg. §1.147(f)-1(d)(4)(iii))
To address concerns that a public notice posted on a large, complex Web site may be difficult for the intended recipients of that public notice to locate, the final regs clarify that a public notice must be posted on the governmental unit’s primary public Web site in an area of that Web site that is used to inform its residents about events affecting the residents. (Reg. §1.147(f)-1(d)(4)(iii))
Contents of notice and approval. The proposed regs provided that a project was within the scope of a public approval if the public notice and approval included the name of the expected initial legal owner or principal user of the project or, alternatively, the name of the true beneficial party of interest for such legal owner or user. The final regs add a rule under which a general partner of a partnership that owns a project may be treated as a true beneficial party of interest for this purpose. (Reg. §1.147(f)-1(f)(2)(iii))
For qualified 501(c)(3) bonds issued to finance pooled loan programs that are described in Code Sec. 147(b)(4)(B), the proposed regs provided a special, two-stage public approval process. At the time that such bonds are issued, the issuer may have only limited information about the projects to be financed. Thus, for the first stage of public approvals occurring before the qualified 501(c)(3) bonds are issued, the proposed regs allowed the public notice and approval to include limited general information about projects to be financed. For the second stage of public approvals for these financings, before the issuer originates a loan to a Code Sec. 501(c)(3) organization or governmental unit, the proposed regs required a supplemental public approval satisfying the ordinary requirements of Code Sec. 147(f) for the bonds financing that loan.
Under the final regs, for this type of financing, an issuer may either meet the general rules on the public approval requirement or, alternatively, at the issuer’s option, may meet the special rules for a two-stage public approval process. In particular, under this optional two-stage public approval process, a pre-issuance issuer approval is required and a supplemental post-issuance public approval, including issuer approval and host approval, is required. (Reg. §1.147(f)-1(f)(5))
Definition of “project.” The previously-existing final regs define a facility to mean a tract or adjoining tracts of land, the improvements thereon, and any personal property used in connection with such real property. The previously-existing final regs further provide that non-adjoining tracts of land may be treated as one facility only if they are used in an “integrated operation.” The proposed and new final regs use the term “project” rather than “facility” and generally define a project as one or more capital projects or facilities, including land, buildings, equipment, and other property, to be financed with an issue, that are located on the same site, or adjacent or proximate sites used for similar purposes. Because of the potential difficulty of determining whether facilities are used in an integrated operation, the proposed regs proposed to remove the provision of the previously-existing final regs that allowed financed assets on non-adjoining tracts of land to be treated as one facility if those assets were used in an integrated operation.
The final regs retain the longstanding “integrated operations” standard from the previously-existing final regs to allow capital projects or facilities that are located on nonproximate sites to be treated as a one project if those capital projects or facilities are used in an integrated operation. (Reg. §1.147(f)-1(g)(7))
Effective date. The final regs apply to bonds issued pursuant to a public approval occurring on or after Mar. 31, 2019. An issuer may apply the provisions of Reg. §1.147(f)-1(f)(6) (regarding deviations in public approval information) in whole, but not in part, to bonds issued pursuant to a public approval occurring before Mar. 31, 2019. (Reg. §1.147(f)-1(h))